Soviet drive for third-world raw materials gathers steam

June 10, 1981

By Peter O'NeillSpecial to The Christian Science Monitor

London

The groundwork has been laid by the Soviet Union and its East European allies for a major thrust into strategic Western and third-world markets. Almost unnoticed the Soviets and their COMECON partners have laid the foundations for a new trading empire in the developing world.

In a Western multinational-style operation they have discreetly set up more than 600 companies. In the West they have concentrated on trading operations. In the continent of Africa their target is strategic raw materials and minerals -- a prize that the West is also aiming for to fuel its industries into the 21st century.

Up to now, many politicians and businessmen have been mesmerized by the military aid that Eastern Europe has given to the developing world -- $23 billion from 1955 to 1977, according to the US Central Intelligence Agency.

But research by East European specialists shows that COMECON, the East European trading bloc, realizes the heyday of arms aid to liberation movements is coming to an end. And instead the East bloc is turning to organized, coordinated multinational trade.

The prize is no longer ideological solidarity, but the potential markets of the developed and developing nations and a stake in one of the richest raw material treasure houses of the world -- the African continent.

Coordinated operations by some COMECON members have been under way for only 15 years at best. Yet Western Europe was in Africa centuries ago. So Eastern Europe's recent progress is significant not only for Western companies and governments but for the impact it will have on restructuring North-South trade.

In Budepest in November 1978 African specialists from socialist countries met and advised East bloc governments and the COMECON secretariat that "economic relations with the developing countries should be coordinated more precisely" and that a detailed program should be drawn up.

The trading emphasis seems to be on selling surpluses from Eastern Europe that cannot easily penetrate "capitalist" markets -- either because of tariff barriers or politico- military barriers in the European Community (EC) or in the United States, for example. Goods are often of poor quality, another market barrier in the West. Because of shortages of foreign exchange, bartering often suits communist and developing countries.

In order to sell you need outlets. Published estimates show there are only about 12 Western companies in COMECON countries with Western equity. But, by the end of 1978, at least 359 COMECON companies had been set up in countries that are members of OECD -- the Organization of European Cooperation and Development. Research shows at least 185 instances of the same thing in developing countries, and 75 of those were in Africa.

Financially the numbers position is reversed. The COMECON companies in Western nations represented fixed assets of $500 million, whereas those in the developing world were worth nearly $4 billion. Whereas in the OECD nations the emphasis was on service, marketing and manufacturing, in developing countries 92 percent of fixed assets were in resource development such as mining.

Through recent billion-dollar purchases of mining companies, multinationals like British Petroleum and Exxon are seeking control over vital raw materials -- exactly the same target as COMECON. COMECON industrialization has led to a gargantuan demand for raw materials. Third-world links therefore focus on mining, extraction, and processing; intermediate processing for the home market; and final processing abroad for the home market.

One way of financing these operations is through the 22 or so COMECON banks, insurance, and leasing companies. In 1978 their total assets were estimated at over $9 billion -- 78 percent represented by 11 Soviet companies. The Moscow Narodny Bank, London, and the Banque Commerciale pour l'Europe du Nord in Paris, alone had combined assets approaching $6 billion.

The establishment of diplomatic relations, followed by official visits, have produced joint ventures in black Africa. A similar drive is occurring in Latin America.

Two-thirds of the 600 or so COMECON multinational companies have been formed since 1970. Increased sophistication is evident from diversification of investment and new start- ups and expansion through reinvested profits and local borrowing rather than new capital from the home economy of the COMECON state concerned.

COMECON strategy has taken a leaf out of the books of OECD multinationals, and its governments can offer a much cheaper deal to start than any shareholding company from the West in the hope of a long-term payoff. They offer third- world countries plant and technical experts in return for raw materials, just as Western multinationals offer COMECON plant and experts in return for part payment with the resulting product. Although comparatively small in scale at the moment, such operations will offer direct competition in the long term to Western ventures.

Politics count less and less, so it is wise to look elsewhere than just at "socialist" African countries to spot the competition. In 1980 Moscow concluded an agreement with Morocco for the sale of phosphates on a large scale -- despite political differences over Soviet support for the Polisario Front. Mozambique has maintained trading links with South Africa, despite its close relationship with the Soviet Union.

In 1978 Angola ranked fifth in sub-Sahara Africa in trade exchanges with the USSR, but it also keeps its other options open. It sells 80 percent of its oil to the US and the rest to Western Europe and Japan. The West is Angola's main trading area, and exports to Eastern Europe represent only 8 percent of the total. It also uses Western oil consultants.

The USSR is seeking long-term cobalt supplies, despite ideological differences, with Zambia through an $85 million deal concluded in March last year including arms, MIG jet aircraft, and training of Zambian military personnel. This also opens up a funnel for the supply, through Zambia, of central African mineral resources vital to Soviet and COMECON industries.

Since 1960 there have been an amazing 260 or so official visits between Romania and African countries. That excludes relations with liberation movements.

Romania, like other COMECON countries, tries to work on a foreign exchange basis with developing countries, but it is often forced to extend financing credits to enable African countries to buy its goods. Credits by Romania from 1954 to 1975 are estimated at $1.8 billion.

Czechoslovakia, in line with COMECON partners, exports expertise -- 1,000 Czechoslovak experts in 1976 and 1977 to more than 50 developing countries. Its trading rests on arms but includes engineering products. Leading importers were Nigeria, Sudah, Ethiopia, and Zambia for processing raw materials and energy resource extraction.

In 1978, newspaper reports said that Czechoslovakia was exporting whole factories to Ethiopia for agricultural development and had provided a credit of technology through licensing agreements.

East European countries provide cheap or free technical and other education for students from developing countries in the hope there will be a return later when they become leading politicians, officials, or captains of industry.

There is cynicism in Africa, however, about the legacy of foreign educational systems. President Felix Houphouet- Boigny of the Ivory Coast has commented that sending a student to Moscow for his education turns him into a capitalist while a spell in the US turns him into a communist.

It would be wrong to overrate COMECON's progress to date in its building of a trade empire but it would also be foolish to dismiss it out of hand. It is true there are numerous cases of customer dissatisfaction with East European goods or turnkey plants. But there are plenty of successes, too. Nor is the record all one-sided.

Morrison-Knudsen of the US is estimated to be five years behind on its construction of the Shaba power line in Zaire. ITs own share of the World Bank-backed project already has a cost overrun of $100 million.

Only the future will tell how this strategy will eventually take full shape, but clearly its emb ryonic days are over -- it is now comfortably established.